Rescue crews have saved 200 people from the water off Papua New Guinea's north-east coast after a ferry sank with as many as 350 people on board, officials said.

An aeroplane from Australia, three helicopters and eight ships scoured the search area on Thursday after the MV Rabaul Queen went down while travelling from Kimbe on the island of New Britain to the coastal town of Lae on the main island, the Australian Maritime Safety Authority said in a statement.

The Australian Prime Minister, Julia Gillard, called the incident a "major tragedy" and said her country was providing assistance to its near neighbour.

"Given the likely very high loss of life here, I think when this news comes to the attention of Australians around the country they will be thinking about the people of PNG as they respond to this tragedy," she added.

The Australian maritime agency initially detected the ferry's distress beacon and alerted the PNG Maritime Rescue Coordination Centre, which is coordinating the rescue effort. The Australian statement said 219 survivors had been recovered by five ships by late on Thursday.

It said 350 people were believed to be on board, but Papua New Guinea's National Maritime Safety Authority (NMSA) rescue co-ordinator Captain Nurur Rahman said the true figure was likely lower.

"I cannot confirm or deny the 350 missing number. It is hearsay," Rahman said. "I have not seen the manifest as yet, but it is likely around 300."

Rahman said he was being fed information from an NMSA agent on board one of the ships.

"The dynamics of this thing are changing all the time, minute by minute," he said.

Ship operator Star Ships could not be immediately contacted for comment.